Suppose You Are Advising a Retiree Who Holds 2,000 Shares

question 79

Multiple Choice

Suppose you are advising a retiree who holds 2,000 shares of LargeDiv Corp. The company is largely held by tax-paying institutional investors and has announced that it will shortly be issuing a large dividend. Because the shares are held in the retiree's Roth IRA, she will not incur taxes on either capital gains or dividends. The retiree has decided to sell the shares sometime this year, and use the money for living expenses. You expect the only upcoming change in the stock price will result from the dividend. Ignoring any discounting for time, what advice should you give?

• A) Sell the stock now-the stock price is likely to decrease more than just the dividend amount.
• B) Sell the stock ex-dividend-the stock price is likely to decline, but by less than the dividend amount.
• C) It doesn't matter when the stock is sold.
• D) Sell the stock now-it is always better to sell the stock immediately regardless of the tax consequences.

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Definitions:

Security Interest

A legal claim or lien on collateral or property, given by the borrower to the lender, to secure repayment of a loan.

Purchase-Money Security Interest

A legal claim that allows a lender to repossess or foreclose on property financed through debt if the borrower defaults, specifically relating to the item purchased.

After-Acquired Property

Refers to assets or property acquired by a debtor after the execution of a loan agreement which may subsequently become subject to the lender's security interest.

Buyer In Ordinary Course Of Business

Describes a purchaser who buys goods in good faith and without knowledge that the sale violates another party's ownership rights or interests.